Transcript Slide 1

Statewide Retirement Systems
Funding Updates
Presentation to the
Legislative Commission on Pensions & Retirement
Dave Bergstrom, MSRS Executive Director
Mary Most Vanek, PERA Executive Director
Laurie Fiori Hacking, TRA Executive Director
January 13, 2010
1
Why Are We Having These Discussions?
Comparison of SBI Average Returns – for periods ending 6/30/2008 and 6/30/2009
15.0%
10.7%
10.3%
10.0%
10.1%
8.9%
8.1%
9.4%
9.5%
7.2%
8.5% Actuarial Return
5.7%
5.0%
2.8%
2.4%
0.0%
1 Yr
3 Yr
5 Yr
10 Yr
15 Yr
25 Yr
Since 1980
- 3%
-5.0%
- 5%
-10.0%
-15.0%
-20.0%
- 18.8%
-25.0%
FY2008
Return for FY 2010 through 12/31/10: 17%
FY2009
2
Basic Pension Funding Principle
C+I=B+E
Contributions + Investments = Benefits + Expenses
3
Common Modifications to Address Funding
Elements of funding principle the Boards and Legislature
could modify to address recent investment losses


C – Contribution rates
Proposed employee and employer contribution rate
adjustments
B – Benefits
annual retiree increases
prospective deferred augmentation interest rate
interest on future lump sum refunds
interest on re-employed retiree accounts
4
Financial Status of PERA General Fund
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
69.99 %
53.81 %
Current Contributions*
12.88 % of pay
12.88 % of pay
Contributions Needed
15.55 % of pay
19.61 % of pay
Contribution Deficiency
(2.67) % of pay
(6.73) % of pay
Fiscal Year 2009
Funding Ratio
(Assets as % of Liabilities)
* Employee rate = 6%; Employer rate = 7% (effective 01/01/10)
Source: Mercer Consulting, FY 09 annual actuarial valuation
5
Financial Status of PERA P&F Fund
Fiscal Year 2009
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
Funding Ratio
(Assets as % of Liabilities)
83.22 %
63.55 %
Current Contributions*
23.50 % of pay
23.50 % of pay
Contributions Needed
29.99 % of pay
39.13 % of pay
Contribution Deficiency
(6.49) % of pay
(15.63) % of pay
*Employee rate = 9.4%; Employer rate = 14.1%
Source: Mercer Consulting, FY 09 annual actuarial valuation
6
Financial Status of PERA Correctional Fund
Fiscal Year 2009
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
Funding Ratio
(Assets as % of Liabilities)
94.85 %
72.93 %
Current Contributions*
14.58 % of pay
14.58 % of pay
Contributions Needed
14.03 % of pay
16.77 % of pay
0.55 % of pay
(2.19) % of pay
Contribution Deficiency
*Employee rate = 5.83%; Employer rate = 8.75%
Source: Mercer Consulting, FY 09 annual actuarial valuation
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What if we do nothing to PERA General?
Public Employees Retirement Association of Minnesota
Projection of Funding Scenarios
25%
100%
Baseline – 8.5% return for years after
FY2009. Based on 2039 amortization date.
90%
20%
80%
70%
15%
60%
53.81%
47%*
10%
50%
40%
30%
5%
20%
10%
0%
0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2020
2022
2024
2026
2028
2030
Each of first 10 years is presented, every other year after
Contribution Deficiency (% of pay)
Source: Mercer Consulting Services
Funding %
*Projected Funding Ratio
8
Path to PERA Long-Term Sustainability
Where do we go from here?

Shared responsibility and sacrifice– active members, employers, deferred
members and benefit recipients will need to be part of the solution.
 Reduce annual benefit recipient adjustment
Decrease annual adjustment from 2.5 percent to 1 percent until plans are again at least 90 percent
funded (market value).
 Increase contributions 0.5 percent
Coordinated Plan shared equally between employees & employers
Police & Fire Plan – shared between employees and employers

Reduce certain active and former member benefits
o
o
o
Reduce interest rate on refunds from 6 percent to 4 percent
Reduce deferred interest for current deferred members and future terminated vested members to 1
percent --currently 3 percent to age 55 and 5 percent thereafter for those hired prior to July 1,
2006 or 2.5 percent for all years for those hired after July 1, 2006.
Increase vesting to five years
o
Eliminate interest on re-employed retiree accounts .
9
Path to PERA Long-Term Sustainability
What do we save if Board’s recommendations are adopted?
PERA General
PERA P & F
(2.67) %
(6.49) %
3.6 %
9.45 %
Reduce deferred interest
0.45 %
0.45 %
Increase contributions
0.50 %
0.50 %
Cost Change/adoption of
assumption changes
(0.40) %
N/A
Resulting actuarial
contribution sufficiency
1.48 %
3.91 %
Projected Market Value
contribution deficiency
(6.73)%
(15.63)%
Remaining Market Value
contribution deficiency
(2.58)%
(5.23)%
Actuarial Value
Contribution Deficiency
Modify Annual Increase:
1.0 percent for future yrs. *
* Until plans are 90 percent funded.
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Source: Mercer Consulting Services
Path to PERA Long-Term Sustainability
The funding line moves back in the right direction, but contribution requirements continue to rise, so
additional considerations will be studied over the next several years for future consideration.
Public Employees Retirement Association of Minnesota
Projection of Funding Scenarios - Proposed Assumptions
8.5% Discount Rate, 1.0% COLA, No COLA Suspension,
1.5% Augmentation, 0.5% Contribution Increase
30%
100%
90%
25%
86%
11% return for 3 years after FY2009,
8.5% return for all years after
80%
70%
20%
60%
15%
50%
40%
10%
30%
20%
5%
10%
0%
0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2020
2022
2024
2026
2028
2030
Each of first 10 years is presented, every other year after
Statutory (% of pay)
Required (% of pay)
Source: Mercer Consulting Services
Funding %
11
Financial Status of MSRS General Plan
July 1, 2009
Actuarial Value
July 1, 2009
Market Value
30 Year Amortization
30 Year Amortization
(5 yr smoothing of investment losses)
(no smoothing of investment losses)
85.9 %
65.61%
10 % of pay
10 % of pay
Contributions Needed**
11.5 % of pay
16.25 % of pay
Contribution Deficiency**
(1.5) % of pay
(6.25) % of pay
Fiscal Year 2009
Funding Ratio
(Assets as % of Liabilities)
Current Contributions
•Source: Mercer Consulting, FY 09 annual actuarial valuation – EE rate = 5%; ER rate = 5% (eff. 07/01/10)
** 2010 Legislation to propose 30 year amortization; amounts estimated using FY09 valuation results
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Financial Status of State Patrol Plan
Fiscal Year 2009
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
Funding Ratio
(Assets as % of Liabilities)
80.58 %
62.05 %
Current Contributions
26.0 % of pay
26.0 % of pay
Contributions Needed
38.16 % of pay
50.21 % of pay
(12.16) % of pay
(24.21) % of pay
Contribution Deficiency
* Source: Mercer Consulting, FY 09 annual actuarial valuation - EE rate = 10.4%; ER rate = 15.6%
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Financial Status of MSRS Correctional Fund
Fiscal Year 2009
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
Funding Ratio
(Assets as % of Liabilities)
71.88 %
55.62 %
Current Contributions
20.70 % of pay
20.70 % of pay
Contributions Needed
24.85 % of pay
28.57 % of pay
Contribution Deficiency
(4.15) % of pay
(7.87) % of pay
* Source: Mercer Consulting, FY 09 annual actuarial valuation – EE rate = 8.60%; ER rate = 12.10% eff. 7/1/2010
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What if we do nothing ?
State Employees Retirement Fund
Projection of Funding Scenarios
25%
20%
100%
90%
Baseline – 8.5% return for years
after FY2009. Based on 2039
amortization date.
80%
65%
70%
15%
60%
50%
10%
40%
30%
5%
20%
18%
10%
0%
0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2020
2022
2024
2026
2028
2030
Each of the first 10 years is represented; every other year after
Source: Mercer
Consulting Services
Contribution Deficiency (% of pay)
2032
2034
2036
Projected
funded
ratio
2038
15
Funding %
Path to MSRS Long-Term Sustainability
Where do we go from here?

Shared responsibility– active members, employers, deferred members and
benefit recipients will need to be part of the solution.
 Reduce annual benefit recipient adjustment
Decrease annual adjustment from 2.5 percent to 2 percent until plans are again
at least 90 percent funded (market value).
 Extend amortization to 30 years and modify some actuarial assumptions.
 Reduce certain active and former member benefits
o Reduce interest rate on refunds from 6 percent to 4 percent
o Reduce deferred interest for current deferred members and future
terminated vested members to 2 percent --currently 3 percent to age 55
and 5 percent thereafter for those hired prior to July 1, 2006 or 2.5 percent
for all years for those hired after July 1, 2006.
o Increase vesting to five years
16
o Eliminate interest on re-employed retiree accounts .
17
Path to MSRS Long-Term Sustainability
What do we save if the Board’s recommendations are
adopted?
General
Correctional
State Patrol
(1.5) %
(4.15) %
(12.16) %
.9%
1.7%
4.10%
Reduce deferred interest
0.7%
1.2%
0.20%
Increase contributions
0.0%
0.0%
10.00%
Cost Change/adoption of
assumption changes
1.10%
N/A
N/A
Resulting actuarial contribution
sufficiency
1.20%
(1.25)%
2.14%
Projected Market Value contribution
deficiency
(6.25)%
(7.87)%
(24.21)%
Remaining Market Value
contribution deficiency
(3.55)%
(4.97)%
(9.91)%
* Until 90% funded
Future savings from longer vesting and benefit reductions 17
Actuarial Value Contribution
Deficiency
Modify Annual Increase: 2.0 percent
for future yrs. *
Source: Mercer Consulting Services
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Path to MSRS Long-Term Sustainability
State Employees Retirement Fund
Projection of Funding Scenarios with 3.25% Reduction to Deficiency in 2011
25%
100%
Baseline with rebound – 11.0% return for 3 years after FYE
2009, 8.5% return after. Based on 2039 amortization date.
90%
20%
80%
70%
15%
60%
50%
10%
40%
30%
5%
20%
10%
0%
0%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
Each of the first 10 years is represented; every other year after
Contribution Deficiency (% of pay)
Source: Mercer Consulting Services
Funding %
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Financial Status of TRA
July 1, 2009
Actuarial Value
(5 yr smoothing of
investment losses)
July 1, 2009
Market Value
(no smoothing of
investment losses)
77 %
60 %
Current Contributions
11.69 % of pay
11.69 % of pay
Contributions Needed
16.81 % of pay
22.76 % of pay
Contribution Deficiency
(5.12) % of pay
(11.07) % of pay
Fiscal Year 2009
Funding Ratio
(Assets as % of Liabilities)
* Source: Mercer Consulting, FY 09 valuation – EE rate = 5.5%; ER rate = 5.5%
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What if we do nothing?
60% Funded
Ratio FY09
Assumes no changes in
contributions or benefits
Optimistic Investment Assumptions
Normal Investment Assumptions
0%
Purple Funded %: Current Contributions (11.75%), 8.5% investment return in all years
Green Funded %: Current Contributions (11.75%), 11% investment return for 3 years; 9.5% thereafter
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How did we get here?
1. Severe market downturns in 2000’s
 Market declines in 2001- 2002 – down 15%+
 Market plummets in 2008-2009 – down 24%
2. Extra investment returns of 1990’s not retained in TRA Fund –

Large increases in retiree annual increases – 9.7%/year, 1997-2000;
3/4th of current unfunded liability is due to Post Fund; over 60% of TRA
liabilities are for retirees

Precipitous rollback in TRA’s employER & employEE contributions
• EmployER rate cut from 8.14% to 5.0%
• EmployEE rate cut from 6.5% to 5.0%
• Rate cut = to $176 million/year
21
TRA Contributions Higher in Past
Low funding
ratio/deficit
Full funding
reached
Employer /Employee
Contributions in Other States
Employer Rate
Employee Rate
22
Path to TRA Long-Term Sustainability
Where do we go from here?

Shared sacrifice – active members, employers, deferred members and
benefit recipients will need to be part of the solution.
 Reduce annual benefit recipient adjustment
Temporary 2-year suspension (Jan. 2011 and Jan. 2012)
2 percent annual increase thereafter until plan is stabilized
 Increase employee and employer contributions - phased in over 4 years
2 percent for employers – phased in 0.5% per year, July 1, 2011 – July 1, 2014
2 percent for employees – phased in 0.5% per year, July 1, 2011 – July 1, 2014
 Reduce certain active and former member benefits
Reduce interest rate on refunds to 4%; reduce deferred interest for current
deferred members and future terminated vested members to 2%; eliminate
interest on re-employed retiree accounts.

Re-evaluation of all elements in 5 years – Investment returns will have a major
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impact (unknown).
Path to TRA Long-Term Sustainability
TRA Board Recommendations
Deficiency
Market value
(11.07%)
Modify Annual Increase: 2 percent for future years until fund stabilized
2.0 %
Suspend Annual Increase for two years (2011-12)
1.0 %
Increase contributions: 2% employers, phased in 0.5%/yr, 2011-2014
2.0 %
Increase contributions: 2% employees; phased in 0.5%/yr, 2011 – 2014
2.0 %
Reduce deferred interest rate to 2%, reduce refund rate to 4% and ELSA rate to 0%
0.55 %
Savings from assumption changes
0.20 %
Expected revenue/savings from changes
Net remaining actuarial contribution (deficiency)/sufficiency
7.75 %
(3.42 %)
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Path to TRA Long-Term Sustainability
F
u
n
d
i
n
g
94%
100%
90%
80%
60% Funded
Ratio FY09
Proposal – Optimistic
Assumptions
70%
Proposal – Normal
Assumptions
60%
50%
40%
R
a
t
i
o
76%
30%
No Change Normal Assumptions
No Change Optimistic Assumptions
20%
0%
10%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2020 2022 2024 2026 2028 2030 2032 2034 2036
Each of first 10 years is presented, every other year after
Purple: Current Contributions (11.69%), no changes in contributions/benefits, 8.5% return in all years
Green: Current Contributions (11.69%), no changes in contributions/benefits, 11% return for 3 yrs; 9.5% thereafter
Blue: Higher Contributions (15.69%), 2 year COLA suspension with 2% thereafter, reset amortization period in 2016, 8.5% return in all yrs
Red: Higher Contributions (15.69%), 2 year COLA suspension with 2% thereafter, reset amortization period in 2016, 11% return for 3 yrs;
9.5% thereafter
25
* Source: Mercer Consulting actuarial projections, 12/16/09
MN Public Pensions Important to State





MN’s public pension systems serve nearly one-half million persons,
1 in 10 Minnesotans
More than 90 percent of the systems’ benefit recipients reside in
Minnesota
Systems paid out over $2.5 billion in benefits which added $3.3
billion on state economy and led to 22,500 additional jobs statewide
State/local taxes paid by recipients and holders of new jobs
exceeded public employer pension contributions to the systems by
$80 million annually
Economic impact of pension benefits was larger than the gross state
product from mining and 92% of agricultural (crop/animal)
production.
Source: Lubov, Andrea. “Measuring the Impact of Minnesota’s Retirement Systems, March 2008
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